Market Insights

Look for cup and handle breakouts in momentum growth stocks. That’s the basic message of William O’Neill’s classic book How to Make Money in Stocks. Right now, that pattern seems to be active throughout the technology sector.

The “cup” is when a stock forms a basin-like shape after a big rally. The “handle” is when it begins to break out by making a higher low. The idea is that a company has a true growth story, often a successful technology. Shares run hard, but need to pause for a few months. O’Neill’s approach tries to catch them as they start moving again.

The PowerShares QQQ Trust (QQQ), which tracks the Nasdaq-100, may be forming such a pattern right now. It’s been chopping in a range all year, but made higher lows. That’s a potential cup. And in the last month the ETF has made a higher low in a tight range. That’s a potential handle. And, of course, QQQ qualifies on the other criteria because it’s been trending higher for over a year and includes some of the best known growth companies like Facebook (FB) and Nvidia (NVDA). Cup, check. Handle, check. Momentum, check. Growth, check.

PowerShares QQQ Trust (QQQ), showing potential cup & handle.

Speaking of FB and NVDA, the social-media giant and chip maker have traded very similarly to QQQ. They’ve both made higher lows in May after a month or two of basing out.

Other popular tech stocks not listed on the Nasdaq seem to be acting similarly. Look at cloud juggernaut Salesforce.com (CRM), which reported better-than-expected earnings and raised its guidance Tuesday night. (There’s your growth.) Square (SQ) also seems to be breaking free of a cup and handle pattern.

Bottom line, this isn’t a trade recommendation and everyone needs to do their own homework. But a classic signal may be taking shape throughout the market’s most closely followed sector.

Facebook (FB), showing potential cup & handle.